Document Sample
					 Global Markets, Financial
Crisis and Resource Security
                   S L RAO
    Institute for Social and Economic Change,
   Bangalore; and Distinguished Fellow, TERI
                   October 3 2008

   Galloping Demand: Since the first oil well was struck in
    1859, 1.5 trillion barrels of oil equivalent have been
    produced. In the next twenty-five years the world will need
    the same amount.
   U.S. Dept of Energy says we will reach “peak” oil-when
    the supply is at a peak and then goes downwards, by 2025;
    some experts think oil supplies will fall earlier.
   Virtually every product we buy, own or use, requires oil
    directly or indirectly; the average car takes approximately
    27 to 42 barrels of oil to produce; the average desktop
    computer more than 10 times its weight in fossil ;fuels;
    every calorie of food eaten in the USA requires roughly 10
    calories of fuels; this will rise.
   Gas usage will also rise as coal comes into disrepute.
                   Background- 2
   Today the world faces a triple crunch:
      a credit fuelled financial crisis;-tighter liquidity, rising
       interest rates, less capital available from markets or
      accelerating climate change; affecting ability to use
       more of cheap coal and consequently the need for
       less polluting fuels;
      soaring energy prices; leading to inflation, and
       declining employment;
      All are underpinned by the fast approaching time of
       “peak oil”; the necessity to find alternatives is
       now, not later.

           International Issues
   Oil Power: Producing countries have discovered their
    power to halt the world. Now the power is used as
    instrument of foreign policy and in disciplining other
    countries to follow their will. Examples:
      In October 1973 when Middle East oil exporters
       decided to punish the USA and the West for
       supporting Israel in the Yon Kippur War, by
       stopping exports. It quadrupled the price overnight
       in the USA.
      The power of the oil producers was further
       established when the USA made a pact with Saudi
       Arabia to bankrupt the Soviet Union under Reagan,
       the price of oil was brought down from $26.46 in
       December 1985 to 10.25.
             International Issues-2
     Oil and Gas exporting countries are authoritarian
      states. Their prosperity depends on high oil prices.
      There is no internal democracy to question actions.
     The declining dollar demands that oil prices rise at
      least proportionately.
       Some small countries also follow the OPEC lesson.
        Venezuela’s major customer is USA but after taking over
        American company assets, it still keeps threatening cut off
        of oil supplies
   Bolivia-major customer is Brazil, highly dependent on
    Bolivia and concerned about Bolivian instability. This
    could become a problem soon.
          International-Growing Russian
   Growing influence of Russia through Gazprom, $91 billion last year,
    employs 432000, pays taxes=20% of Russian budget, is supplying 1/4the
    of Europe‟s‟ gas to major countries excluding U.K., and is important
    supplier also to China and South Korea. Russia will use energy and arms
    to exercise influence. Russia‟s weakness is overexploitation of fields, lack
    of expertise in getting more oil out of old wells and lack of investment in
    developing new ones. For India it is essential to nurture close ties with
    Russia for both.
      European foreign policies, (for example in reacting to invasion of
        Georgia), have been influenced by the dependence. The weakness
        will grow as the Russians extend markets and deepen shares.
      Gazprom drove CEO of joint venture BP-TNK out of Russia;
        forced sale of a major field Kovykta on dubious grounds; similarly
        took majority control over Shell joint venture on grounds of violation
        of environmental rules.                                             6
        International-Russian power
   Pipeline control over supplies to Europe from Central Asia is a key part of Russian strategy.
   Supplies to old vassals at very subsidized prices (like Ukraine and Georgia) used to keep
    them in Russian camp. India learnt a lesson that Russia will not subsidize our arms
    purchases. Do not look for favours.
   Americans crowed victory with the Baku-Tibilsi-Ceyhan (TBC) pipeline intended
    to bypass Russia for supplying Europe; subsequent American strategy is to access
    Central Asian energy supplies. Strategy now in difficulty as Russia refuses
    permission for an undersea Caspian pipeline for Kashgan gas under control of
    Exxon-Mobil and Conoco-Phillips.
   Russia and Ukraine relationship is fraught as Ukraine tries to get into American
    camp; however heavily subsidized prices for energy because of old Soviet legacy
    saw squeeze on supplies and threats on prices. Ukraine is en route for gas to
    Europe. When Russia temporarily stopped supplies to Ukraine demanding higher
    prices, Ukraine stole gas meant for Europe. Europe lost supplies temporarily and
    now searching for alternatives. Emphasized the danger from hostile countries
    enroute for oil and gas pipe lines.
              (Contd….)
      Similarly old Soviet vassals like Czechoslovakia and
       Poland and Bulgaria, very dependent on supplies and
       prices and will experience threats and squeeze as part of
       Russian attempt to maintain imperial influence.
   But as major customer, Europe has strong negotiating
    power. Russia‟s freedom to use supplies against old vassal
    states is limited since Russia is heavily dependent on
    revenues from Europe. Cannot afford to antagonize
    Europe. Of course old vassals will be made to pay higher
    prices over time. Good to be major customer for some
   Newly rich oil states are driven by greed; unable to
    counter the “Dutch disease” of sudden oil wealth. But
    they are learning.
     External Influence on Domestic
   Sovereign Wealth Funds of Abu Dhabi, Dubai, etc state that
    they will not use SWF as foreign policy instruments. They now
    own chunks of USA‟s largest financial institutions. SWFs as
    threat as they dominate important parts of economy of host
    countries. International Regulation to ensure transparency
   India-China Rivalry for Resources: India‟s experience with
    Burma; reflects rivalry with China over energy.
   Similar situation could arise with Nepal and our impending
    hydro electric dependence on them; China could intervene; India
    needs to move quickly and deepen India Nepal relations.
   (Continued)

     Global Markets: Supply and
   Rising Fuel Costs: Oil prices have been volatile;
    rising prices of oil and gas since 1973; after every fall,
    equilibrium is at much higher levels
   Sympathetic rises in coal and uranium prices.
   Emissions keep coal lagging oil and gas prices;
    uranium may catch up.
   India and China will place preference on coal use-
    easier domestic and foreign availability and control.
   Need to move fast into nuclear; and priority to
    developing thorium as fuel source.
   Essential to find domestic and overseas resources,
    and increase supplies of energy sources. (Contd….) 10
   Changing Global Demand Configuration-BRIC+S Korea
    +Mexico, and developed economies-galloping demand.
   Blame game for emissions;
   Climate change concerns and pressures on BRIC + South
    Korea + Mexico to cut emissions-use less coal-they do not
    use enough gas or nuclear; mainly due to problems of
    availability and cost
   Energy efficiencies and conservation opportunities; need
    to understand systems and apply; Problems of technology
    availability and cost; joint research projects might reduce
    dependence on high cost developed economy research..
   Globalization and opening up has led to quick transmission of
    shocks over world-example of financial meltdown in the USA
   BRIC countries-major problem is cap on domestic power
    tariffs to support their poor, making it difficult to pay rising
    prices for oil and gas used for power. Coal becomes the only
    viable alternative                                            11
                  Financial Crisis
   World financial flows around 8 times larger than trade and
   Complex financial products created and traded, totally unregulated.
    Unraveling of complex financial products led to collapse.
   Overseas Wealth Funds have become very powerful as saviours
    and investors. Essential to understand their influence. Except China
    and Singapore they are from oil exporting countries. All are
    authoritarian states, with little domestic accountability.
   So far, except Russia and Venezuela have not used their oil power.
   But could be a “Trojan Horse” strategy, building confidence.
   Interconnected chain of relationships in world economy. Example:
    AIG, owns world‟s largest aircraft leasing company, will cut orders,
    airlines charged higher lease rent, higher airline tariffs, declining
    traffic, Airbus & Boeing lose business, airlines close, workers laid
    off, effect all over the world)
   High oil prices also due to weak dollar; Dollar hit by
    huge American deficits, low savings, dollar as reserve
    currency, U.S. as investment destination, unraveling of
    American financial institutions. Unlikely to change
    soon. But Euro is no substitute. World will continue to
    use dollar. Unless USA tightens its economic policies,
    dollar will continue to cause economic instability.
   India becomes vulnerable because of high fiscal and
    current account deficits and dependence on FII flows,
    causing volatile rupee; declining rupee. India has high
    dependence on imported oil and gas, now coal and
    uranium as well. Rising oil prices and poor economic
    fundamentals are double whammy for India.

                        Gas pricing
   We could regulate prices of all domestic fuels-oil and gas as
    well as coal
   Since main user industries are power and fertilizer with regulated
    prices, their tariffs cannot easily be raised; already distribution
    companies are short of revenues;
   OR allow free „market‟ pricing for gas as per NELP
    commitments, and government reimburses difference between
    cost of fuels and power tariffs;
   Government can tax the excess profits after allowing adequate
    returns for exploration and production and use excess profits tax
    revenue to defray cost of reimbursing producer for his losses
   Finally, different systems for pricing public sector gas and
    private lessee of gas fields, is wrong

                Energy Resources
   Oil and Gas-supplies can increase with higher prices-by deep
    sea drilling, oil shale, Alaska, offshore drilling in fragile areas, etc.
    But since 1990 no “giant” oil and gas fields have been
    discovered-only 35 large ones but with maximum of 1 billion
    barrels a day. The last giant fields were discovered offshore in
    Brazil at great depths below water, and are mostly “dirty” (heavy)
    oil, and still small in relation to world consumption.
   Coal- overestimated reserves in India. India is short of coal as
    well and import demands will rise sharply.
   Rising energy demand from India and China-resulting in
    international competition to control coal, oil and gas;
    willingness to deal with pariah countries like Sudan and unstable
    ones like Nigeria.
   Cooperation, not competition should drive India-China
    relations search for energy resources.
       Other Energy Resources
   Supercritical technologies can make better us of coal
    with less emissions per calorie of energy
   Limitations: technology availability; equipment cost;
    similarly for other “clean coal” technologies
   Coal to oil/gas; Limitations-cost, technology
   Need to push for expanded supplies of bio fuels like
   Ethanol and effect on food supplies as in American
    subsidies leading to corn and soya and wheat shortages
    as land diverted to corn for ethanol, not for food.

            What must India do?
   Need for an immediate “Green New Deal”- a renewables revolution.
   Reduce the use of fossil fuels substantially.
   Green Buildings.
   Renewables-all out on wind and solar; also selected bio-fuels but
    ensure no effect on food production.
   Have tough emissions targets but with no international
   India and China must cooperate in capturing energy resources.
   Recognize the power of oil exporting countries. Foreign policy must
    react accordingly.
   Essential to nurture close ties with Russia, but it may not be the
    reliable Russia of old-e.g.., Admiral Gorchakov, Sukhoi; and dealings
    with other countries.
   Dangers in hostile countries enroute for oil and gas pipe lines.
    Lesson for Iran gas via Pakistan.
   Terms of joint ventures or exploitation of assets in other countries
    must be fair and respect host country interests even if country seems
   Ensure entry into Central Asia has agreement of Russia.
   Nurture India-Nepal relations so that hydro supplies cannot be
    interfered with when they start. Similarly Bhutan.
   Joint R & D with BRIC, Mexico, S Korea on clean coal technologies;
    super critical; to make locally relevant and bring down costs.
   International Regulation for Transparency, with restrictions on
    international finance sector; financial flows need regulation; so do
    complex financial products.
   Similarly Sovereign Wealth Funds must be regulated globally.

   Do not allow Sovereign Wealth Funds especially of what could
    become hostile countries, to invest in India especially in critical areas;
    keep close tabs; preferably give only non-voting shares
   Tough domestic financial regulation especially for off balance sheet
    commitments; regulate derivatives and other complex products.
   Regulate overseas funds flows to prevent debilitating effect on
    Indian stock markets; Mauritius exemption from short term capital
    gains; anonymous P note inflows.
   Diversify foreign exchange holdings from dollar.
   Relate tariffs for domestic gas (and coal if market prices were
    applied) to end prices allowed to major end uses, through regulation
    or excess profits tax.
   Realistic user charges for fossil fuels and power
   Subsidies are removing flexibility from energy and foreign polices
   Go all out for nuclear energy; top priority to using thorium.

               Essential Actions
   India‟s salvation lies in macroeconomic fundamentals
    being strong;
   Discourage volatile financial inflows
   In growth of real economy of agriculture and industry;
   Investment in R & D;
   Improved quality of Education;
   Export growth; more labour intensive organized
    industry; need changes to labour laws;
   Avoid influence of OWF and “camps”

Thank You


Shared By: